Inflation Risk is the Wrong Recession Lesson

Kathryn: It was me that hit the mic, Sofi. It’s always me that hits the mic. I don’t know why you asked the chat who hit the mic.

Robin: Yeah, man, I sit on my hands when we record. You know that.

• • •

INTRO

Kathryn: Hello, and welcome to Optimist Economy. I’m economist Kathryn Anne Edwards.

Robin: I’m editor Robin Rauzi.

Kathryn: On this show, we believe the US economy can be better, and we talk about how to get there one problem and solution at a time. Today on the show, we are going to talk about what I think might be the most harmful assertion made about the economy today.

Robin: What’s that?

Kathryn: I’m wondering, should we just not tell people, so they have to get through all of our fun nonsense in the front? You won’t know. You’ll have to keep listening. I assume they do listen, though. Don’t let the suspense kill you. It’s about inflation. Did Biden cause inflation, basically?

Robin: Oh, okay. That’s what we’re going to talk about. Okay.

Kathryn: That’s the angle I’m taking. As you know in journalism, angles are important, and my favorite one is head-on.

ANNOUNCEMENTS

Kathryn: I think we have got to start with this. Some heroes sent us cash.

Robin: I do love that.

Kathryn: Optimist Economy has a mailing address. It’s a monitored mailbox, and I just got an alert that was like, “You have been sent currency.” And I was like, “You, Optimist, I love you.” I was so touched. We’ve had two people send us cash, and one person wrote a very sweet note with it about how, for the period of time in which she was a stay-at-home mom and wasn’t working, she had her secret stash of mom money for small things. And so I got money from the secret stash of mom money, which I was like, this is the most proud I’ve ever been to have earned income.

Robin: That’s fantastic. Speaking of money, I just wanted to thank the people who have donated to Optimist Economy through their DAF, or donor-advised fund. I like to reach out to everyone who’s made a substantial contribution to Optimist Economy. I have not found the way yet for me to get an itemized list of who you are, but I know you’re there, and I want to thank you, and I will find you later for a personal thank you. Also, thank you to the people — because the show has been on the air for more than a year now — who are renewing their contributions from last year or renewing their membership on Substack. Thank you for that, too.

Kathryn: We mean it as a compliment when we say Robin will find you.

Robin: Right. Not in a stalkery way, in a expressing gratitude way.

Kathryn: It absolutely lifts us both that people listen, that there’s more than five of you — that there’s dozens, thousands of you that listen, which is incredible, and that you support the show. It spurs me on.

Robin: And that we’re only going slightly into debt to produce it.

Kathryn: Yeah, this show is almost out of debt, which when that happens, there’ll be signs.

RETCON

Kathryn: Quick retcon for me. I mentioned in the :Make It Make Sense” economy episode that the first quarter’s GDP estimate had just come out, but that it was probably going to be revised down. And wouldn’t you know, it was revised down. It came out at around 2%. It was just revised down to 1.6%. It has one more revision to go.

And this is just a small note that these revisions are the crowning achievement of statistical agencies in transparency and accuracy, as opposed to a mistake.

Robin: That’s our next T-shirt. I heart statistical agencies.

Kathryn: Do you want to do that? We were thinking about expanding our T-shirt line, and we’re trying to think of what is the best expansion. Is it “I’d rather be consuming leisure”? I think that one’s popular. “Worker bot, not an economist.”

Robin: “Not an economist, just an optimist.”

Kathryn: “Not an economist, just an optimist.” But maybe we need to add “I Heart Statistical Agencies” to the mix, and we can make the heart out of a three and a less-than-or-equal sign.

Robin: You are my kind of nerd.

Kathryn: That was the only retcon I had.

Robin: Okay, I don’t have any retcon.

Kathryn: Wow, we must be really good at this.

TERMS & CONDITIONS

Robin: So I thought we were talking about recessions today.

Kathryn: We’re talking about recessions.

Robin: So I was looking up something about recessions, and then I came across the term The Long Depression. We would think of it in the United States, I think, as the Panic of 1873. But it was 65 months long of a recessionary economy, with complicated international causes people disagree on. A lot of things were happening, including no longer using silver as money in the US and Germany. There was a huge amount of railroad speculation that collapsed, and then agricultural oversupply that caused major disruption in those markets. It basically ran from 1873 to 1879, though some people will say it went on much longer than that. Eighteen thousand businesses went bankrupt, including 89 railroads, and unemployment peaked at 8.25%. It struck me as really interesting because, first of all, I’d never heard of it. Second, it seemed like a significant thing not to have heard of. But also, it reminded me a little bit of the moment that we’re in — of great technological change, potential bubbles related to those technological changes, and the moment of fear that we’re in, that we could enter a really long period of stagnation or decline economically.

Kathryn: Hey, I meant to tell you the show is called Optimist. Sorry, I don’t know if I told you that. I meant to tell you that literally weeks ago — years ago now.

Yeah, the 1873 comparison’s not great. We learn it as the Panic of 1873. It tanks Grant’s second term as president, and it is associated with a speculative overbuilding of capital. They’re building railroads, they’re building docks, they’re building out infrastructure that doesn’t have a return. The speculators go bust. It is good for the long-run productivity of the economy — it lays a lot of groundwork — but it takes a really long time for that to come online. If that kind of sounds like AI —

Robin: It kind of does.

Kathryn: You’re not wrong. It’s not limited to just 1873 and today, though. When we develop new technology, when we move infrastructure forward, we often build things before they become productive. In some ways, it’s a really fascinating way to look at what’s going on right now, from the opposite of the jobs. The story is jobs — we’re going to lose our jobs, it’s going to take our jobs. When I think from a pure economist standpoint, the bigger risk is overbuilding.

Robin: Overbuilding?

Kathryn: Yeah, it’s overbuilding. We’re building out for a technology whose productive capacity we’re not prepared to fully integrate into our economy, and we have put too many eggs in one basket. That is the classic risk. I’ve never heard it called The Long Depression, either.

Robin: Thank Wikipedia.

Kathryn: Well, we are going to talk about recessions. I have two terms. They’re related. The first one is called the output gap. A recession happens, the economy contracts, people spend less, businesses spend less, the economy gets smaller. The output gap is the difference between where we are in GDP and where we could be if we were being used to full capacity. You could almost think of it as your car: you have a 20-gallon tank, but you only have 18 gallons in the tank. The output gap is that two-gallon difference between what you could have and what you currently have. The other way to think about it, if it’s intuitive at all, is the output gap is how big a stimulus package should be to get the economy back on track.

Robin: You only have an output gap if you’re in a recession? Or could we have an output gap right now even though we’re not in a recession?

Kathryn: It’s associated with a drop in aggregate demand, which is almost always a recession. You might have one quarter’s drop in aggregate demand that bounces back up, but typically you have an output gap when your economy’s just not at capacity.

Robin: But couldn’t it be affected by tariffs? I guess tariffs would affect demand, and it’s all the same.

Kathryn: Yeah, because the output gap can be there as you’re coming out of a recovery, too. The economy is coming back, but the output gap is still positive, because we kind of assume the economy is always growing, and the economy for the most part is always growing. So it’s not just that you went down, it’s that you need to catch back up. That is roughly the output gap. The second term I have is called the NAIRU, which is sometimes referred to as the natural unemployment rate, but it’s actually this horrible term called the non-accelerating inflation rate of unemployment.

Robin: It reminds me of a Nehru jacket.

Kathryn: How productive could the US economy be? If the US was firing on all cylinders, if everything was great, how big should the US economy be? That’s really asking, if we were taking full advantage of our productive capacity, what would it be? Well, the unemployment wouldn’t be 0%.

Robin: Mm-hmm.

Kathryn: Because if unemployment were 0%, that would mean we would probably be entering a period of rapidly spiking wages, because there aren’t enough workers — so few workers, in fact, that employers are going to have to throw money at people to get them, wages would go up, and that would lead to inflation. So the NAIRU is the idea that the right level of employment isn’t zero. It’s some low number that keeps prices in check. There are lots of people who would tell you that this thing is absolute nonsense. However, you need to have a NAIRU in order to calculate the output gap.

Robin: So what is the NAIRU?

Kathryn: Right now it’s in the fours. This is the other thing that’s kind of crazy. It changes almost every month. The Fed has a NAIRU estimate, the CBO has a NAIRU estimate, because it depends on where inflation is in the economy.

Robin: Oh, so it’s not like a permanent natural rate?

Kathryn: People nickname it the natural rate of unemployment, and I’m like, this is the most unnatural unemployment rate that I can think of. When something goes horrible and the economy enters recession, you have to come up with policy fast. What that policy should look like is a really high-stakes game, because you’re talking about a massive economy. You misstep, people are unemployed forever. You misstep, you spike inflation. And the reason I wanted to bring these two things up is because in March of 2021, Congress passed the American Rescue Plan Act, and several prominent economists took to the airwaves to say that if you look at the output gap based on the NAIRU that they suggested, the bill was too large, and it would lead to inflation.

Robin: Okay. Should we pause there and take a break before we slide into the Big Pilcrow?

THE BIG PILCROW: DID THE AMERICAN RESCUE PLAN REALLY CAUSE INFLATION?

Robin: And we’re back for the Big Pilcrow on recessions, and: did the American Rescue Plan cause inflation?

Kathryn: If you’ve seen “Project Hail Mary,” I’m Rocky, the little alien going, “Recessions bad, bad, bad, bad, bad.” Have you seen it?

Robin: Yeah, I have. Are you going to sing?

Kathryn: Me as Rocky: recession bad, bad, bad, bad. Bad for me planet. Recession bad, bad, bad for me planet.

Robin: Okay, I got it. Recessions are bad. But from what you were saying before, it sounds like you’re also worried about the response to recessions being bad. Is that it? Or this response particularly being maligned?

Kathryn: The way that US policymakers respond to recessions is really fascinating, and I think it’s probably lost on most people that we have a toolbox we dip into. But we don’t always take all the tools out of the box. Sometimes we just empty out the box and shake it and do everything. And the way that you feel a recession is really the way that policymakers try to respond to it. And we don’t do the same thing every time. We’re not always consistent, and we often learn wrong lessons. Like, the generous recovery package passed in the early days of the Biden administration is the reason why we have inflation — which has become a de facto Republican talking point. My hook there is that that is by far the most dangerous assertion in the economy: that if you help people really well after a recession, you’ll have inflation for five years. It’s not true, but it’s subtle. There’s a real nuance to understanding what happened.

Robin: Talk me through this. What are you worried about? Where do you think our understanding of recessions has gone dangerously off course?

Kathryn: I am worried that policymakers of the future will be so sensitive to inflation fears that they won’t actually respond to recessions.

Robin: Got it.

Kathryn: That’s what I’m most afraid of — that policymakers writ large internalize this really wrong lesson because they’re desperate for some one-sentence takeaway.

Robin: Okay, so what do you think the wrong lesson was? Where do you think it came from? You mentioned things being politicized, but aside from things becoming political talking points, there was some reason it’s taken root.

Kathryn: Okay, so let’s do a quick TikTok, going from February of 2020 — let’s all just hang out inside and give each other hugs — to basically the peak of inflation in June of 2022. What I will argue is that these are probably the wildest 28 months in the US economy, occurring over the pandemic.

• • •

Kathryn: In March and April of 2020, over about a five-week period, the US economy sheds 22 and a half million jobs, and Congress responds with a few pieces of legislation, but in particular the Coronavirus Aid, Relief, and Economic Security Act, AKA CARES. Among all the things that it does, it includes a $1,200 stimulus check for each adult and $500 per child, up to an income cap. At this point in March and April, the US economy is at risk of falling into deflation, which only really happens during depressions, and inflation is at around 0%. So that’s March.

Robin: Right. Great times.

Kathryn: Fast-forward to the end of the year, in December, and we are 10 million jobs short of where we were at the start of the year. Congress passes the Coronavirus Response and Relief Supplemental Act, which I always called CURS. So it’s CARES and CURS. This is another stimulus check. This one is $600 per person. Inflation is at around just over 1%. Prices are very, very low, and the first vaccines are coming out, going to the very elderly, but no one is vaccinated. So in January of 2021, when the December jobs report comes out and it shows that we’ve shed jobs, people panic. And at the same time, there’s a special election in Georgia, and both Democratic candidates who end up being victorious promise that when they come to office, they will vote for another relief package and more stimulus checks. So even though a lot of economists said we probably don’t need another stimulus check, it is a campaign promise from the Georgia trail. So in March, the American Rescue Plan Act is passed and signed into law, and it includes $1,400 of relief per adult. Most of the American Rescue Plan Act is a lot of other stuff, like all the childcare support, a ton of money for schools, a ton of money for state and local governments. But this third round of stimulus check gets added on, and it wasn’t well-targeted. It went to everybody, and it was pretty generous.

Robin: Mm-hmm.

Kathryn: When ARPA passes, the US is still about 10 million jobs short of where we were before the pandemic started. Inflation is just at 1.5%, and starting basically the month that the plan passed, inflation starts to tick up. So even though the economy is adding jobs at a rapid clip, prices start to rise at a rapid clip almost as soon as the act goes into effect. Over the course of the following nine months, we add jobs but also see higher prices in almost every month. And by the end of the year, we are only three million jobs short of where we were at the start of the pandemic, but inflation is almost at 7%.

Robin: Mm-hmm.

Kathryn: The preferred measure of inflation that the Fed is using at the time is indicating that this is temporary, and it won’t go up much more. It’s called the trimmed mean. So they are holding off on broader interest rate policy. But by the end of the year, we’ve gotten two rounds of the vaccine, a lot of stuff has opened back up, inflation is now at 7%, and we are just three million jobs short.

Robin: Right.

Kathryn: Okay, so spring of 2022, Russia invades Ukraine. One of the world’s largest oil producers invades one of the world’s largest food producers — they produce a lot of wheat. And all hope of transitory inflation is lost, and now it looks like the Fed waited too long to respond. They raise interest rates in March of 2022. In June, all of the jobs lost in 2020 have been recovered. It’s absolutely incredible how fast we did this, but it comes with this dual prize of also being the peak of inflation, at 8.9%. And that is when the labor market peaks. Since then, we have been coming back — inflation is falling, and the labor market has been getting weaker since June of 2022. So the assertion is —

Robin: We overshot.

Kathryn: We overshot. You can just look at a graph. It was March of ‘21, that month inflation went up, and bam, bam, bam, inflation took off. And so the reason we had inflation coming out of the pandemic was because we overshot and helped people too much. And they absorb this talking point as if it’s reality — as if before and after are the same thing as cause and effect.

Robin: And is it specifically stimulus checks that went to households, not the school stuff and the infrastructure stuff?

Kathryn: No, it’s really the stimulus checks that went to households that get most of the blame.

Robin: Right. Is this a correlation-is-not-causation thing? We had two big stimulus checks in the months before that, so is it fair to say that this is what tipped us over? Or is that just about trying to blame the Biden administration versus taking the blame in the first Trump administration?

Kathryn: What makes this hard is that it’s a very nuanced conversation. These stimulus checks have inflationary pressure, and the degree of inflationary pressure a stimulus check would have depends on the size of the output gap. Are you trying to put more into the economy than it needs? You’ve got the 20-gallon tank, and you’re adding four gallons, but you already have 18 — you’re overfilling the tank. But at the same time, there are lots of other sources of inflationary pressure. Every other industrialized country saw prices go up. There were also massive supply chain problems. It can have inflationary pressure but not necessarily cause inflation. It can have inflationary pressure and not necessarily cause 8% inflation. It could be pressure. It could be a contributing factor. It could be a cause. Those are three essentially different manifestations of the same kind of effect, and that takes a lot of nuance to internalize as a policymaker and as a person. So people made the argument at the time, including Larry Summers — not one of my favorite people — who wrote an editorial in the Washington Post saying that ARPA was too big. He didn’t say it was going to cause inflationary pressure. He said outright, this is going to cause inflation.

Kathryn: And within a year of it passing, economists all over the country at various research departments are trying to determine how much it adds to inflation, because it definitely is inflationary pressure. You’re giving a lot of money to people. The Summers argument was that it was bigger than the output gap. If you look at prices and the NAIRU, this was bigger than the output gap, so it was going to raise prices.

Robin: Can I just ask a clarifying question? You said because he looked at what prices were, or where GDP was? The output gap is GDP, right?

Kathryn: Yes, but GDP is a function of the NAIRU, so it does depend on prices.

Robin: Okay. Of course. It’s a function of the NAIRU.

Kathryn: It’s my output gap via my preferred NAIRU, actually, Robin. The problem with the output gap is it’s really hard to determine, especially during recessions, when it’s big.

Robin: Yeah.

Kathryn: So a lot of people were like, yeah, okay, Larry, we get it, it’s big, but we have had two stimulus checks with very little consequence in terms of inflation. People are still hurting. This thing goes out before most of the vaccines do.

Robin: I’m sorry — the third stimulus check goes out before most of us got vaccines.

Kathryn: Yeah. The other argument is that inflation increased in every country. All the countries that look like us had inflation go up. The exact path was slightly different, but everybody had inflation.

Robin: So that would suggest the causes were not necessarily this particular check — they were global supply chain shocks or something.

Kathryn: Yeah, because also going on in the background of all this is a global chip shortage. And also going on in the background is massive supply chain issues, because so many ports had been closed for the pandemic, and then they reopen and they’ve got a huge backlog. And another part is that the supply chain didn’t meet the shifting consumer demand — people were stuck in their homes, and so they wanted a lot of goods. What had happened over the course of the first 12 to 15 months of the pandemic is that you had prices spike in particular goods that were having a supply chain issue.

Robin: Everybody —

Kathryn: Everybody wanted toilet paper.

Robin: Actually, I was thinking everybody wanted, like — do you remember Rogue weights? Everybody was building out their home gym, and you could not —

Kathryn: Lumber. Like, I need a deck. I need to score wood off of somebody. It was really like there were fires going on — and this is going to sound bad — the lumber fire, the chip fire, the used car fire, the weights fire, the outdoor patio furniture fire. You could see these prices go up, and they would be isolated.

Robin: But they didn’t come back down. Except maybe lumber. Lumber came back down.

Kathryn: Yeah, but it was like a contagion effect — we had supply chain issues, and we had so much evidence of this. That had been a problem happening over and over in the pandemic, and it happened again. Wait, do you remember when the ship got stuck?

Robin: Yeah, the one in the Suez Canal? Yeah, I do.

Kathryn: I just remember that the first thing I saw after the ship got unstuck was, “Put it back.” Those were such golden days of internet. But ships don’t get stuck in the Suez Canal. That’s not normal. We have supply chain issues. So the non-output-gap, NAIRU take would be that there was just so much going on that also led to inflation. The estimates of how much the Recovery Act increased inflation range anywhere from like 0.5 points to 3 points, where even the —

Robin: That’s how much it added to the inflation, which eventually reached — what’d you say, 8.9%?

Kathryn: Yeah. So even the most aggressive estimate was that it didn’t even account for half of the inflation that we saw. It’s really hard to parse out, too, because the third round of stimulus checks went out to households with an income cap. But at the same time, those households did not hang on to it for that long. The people who saved the most were people who were comfortable. The bottom 25 to 50%, they saved for a little while, but then that money was gone. So if you send a stimulus check out to someone in March who spends it in April, can they really be held accountable for their spending being what caused inflation in June?

Robin: Mm-hmm.

Kathryn: I think that’s why a lot of the Fed at the time thought it was going to be closer to a bump: well, we just gave people a lot of money, evidence is that most of that money has been spent, so it’s filtering its way through the economy. And instead it just went right up.

Robin: So it could have been a little bit of lighter fluid on a fire, but the fire was already burning.

Kathryn: Mm-hmm. And it’s also not clear how much lighter fluid actually made it onto the fire.

Robin: So why do you worry that the lesson we take is really bad — that we don’t want to help people in a recession — if there doesn’t seem to be broad agreement that there was a problem with the first two stimulus checks?

Kathryn: We are discussing the nuanced take. The first two were necessary. This was a special circumstance. The third one might have overshot. But at the end of the day, it was the fastest labor market recovery the US has ever had in a recession, following the worst job loss we’ve ever had. So we actually did okay. I think what people hear is, “Don’t do what Biden did.” It’s not, let’s remember that we have to risk a labor market recovery. And I think some listeners would probably say, “No, but they would help the economy if it was bad,” or, “I don’t have a ton of faith in Congress, but Congress always helps out in a recession.” No, they don’t. No, they didn’t, for the last one. And what makes me so worried is that the Great Recession was such an own goal. That thing was terrible. It did not have to be as bad as it was, if we were not so afraid to help people — which we were — and the result was catastrophic for communities, for people in foreclosure.

Robin: For our politics.

Kathryn: For politics, yeah — the way that politics devolved. It was just such a horribly managed recession. And that was the last one. I feel like the lesson was, okay, don’t do that, and we just keep bouncing back and forth without really learning that you have to help.

Robin: Well, I certainly feel like people felt there were bailouts during the Great Recession. Are you just saying they weren’t for households? That it was big banks?

Kathryn: Yeah. Can I do a Great Recession TikTok? Sofi’s like, “I really challenge you to make this short.” So I will make this one as short as humanly possible — of 15 minutes.

Robin: It was a long recession.

Kathryn: It was a really long recession. It’s so hard for me to say anything without giving the full history of over-the-counter derivatives or subprime mortgage lending. Okay, let me just put it this way. In 2008, the US economy starts to slowly shed jobs at the start of the year. And in the spring, Bear Stearns moves to the verge of collapse, because too much of their portfolio is tied up in over-the-counter derivatives that are invested in mortgage-backed securities, in which the mortgage-backed securities are rated highly, but they in fact contain numerous subprime loans. Those subprime loans were sold to low-income buyers on a floating interest rate, so the past three years’ interest rate hikes that had been coming from the Fed were really starting to generate defaults in the subprime mortgage market. So you have these securities that are actually bad assets. Bear Stearns is the first to go. It happens in the spring, and the Fed arranges for JP Morgan Chase to buy Bear Stearns.

Robin: Mm-hmm.

Kathryn: Through the summer, it just keeps getting worse. Two places you didn’t want to have this happen to were Fannie Mae and Freddie Mac. They own half the mortgages in the US, and they’re about to collapse. And so as we come to September, Fannie Mae and Freddie Mac have to be bailed out by the federal government — the housing something-something act. It’s the first week of September, right after Labor Day. Within the next two weeks, Lehman Brothers fails. There’s no buyer. AIG is rescued by the federal government. Washington Mutual is the largest bank failure on record, and they need a government rescue. By the end of the month, John McCain and Barack Obama have suspended their presidential campaigns, because they’re both sitting senators, and they come back to DC because something has to be done to protect the financial sector from completely collapsing. And they pass the Troubled Asset Relief Program, AKA TARP. It takes them a couple of tries to do it, but it’s $750 billion. It’s shy of a trillion, but it gets added to a little bit. So the very first thing to come out of this recession is a massive bailout. And that bailout fund for TARP eventually ends up going to some of the auto manufacturers as well.

Robin: Mm-hmm. That’s when they bailed out GM.

Kathryn: So by the time Obama becomes president, the backlash to the bank bailouts is already in full effect, and he goes to Congress to ask for a recovery plan. He goes with the American Recovery and Reinvestment Act, ARRA, and he makes it relatively small. The output gap at the time is massive, and he just asks for this relatively measly bill. It passes, but the backlash to the bank bailouts, combined with the fact that they don’t come up with a foreclosure bailout, results in this resurgence of far-right-wing Tea Party Republicans that sweep the 2010 midterms, and they end the Recovery Act spending before it’s even done. And the entire time this is happening, the US is shedding jobs. It sheds jobs from February 2008 to February 2010, and every month we lose more jobs, and we lose more jobs, and we lose more jobs. And then they get into office, and not only do they end the recovery spending, but they then have several fights about sequestration. There’s a budget standoff. They shut down the federal government. And the US economy does not recover the jobs lost in that recession until April of 2014.

Robin: Good Lord.

Kathryn: More than four years later. If you lived through it, you’re like, that is actually about what I remember of a horrible half-decade. And all of that was self-inflicted. Why did they bail out the banks but not have a foreclosure bank to keep people in their homes and take over bad mortgages? Why did they not make the rescue plan larger and have more spending dedicated to state and local governments? If you’re wondering why teachers are paid so little, it kind of goes back to the 2010s, and to the fact that this financial crisis crashed into state governments, who run off property taxes. State government budgets were in free fall. They get so little money from the federal government that they turn to massive spending cuts. And there are states for whom teacher employment and salary has never really recovered from the Great Recession, because they had to bear so much of it. So when I say I’m worried, I’m really just afraid that we would let another Great Recession happen — that we’d let popular politics and lousy one-line phrases about “they bailed out them, but not me” lead to incongruous policy where everybody is made worse off, because you’re trying to punish someone politically. That’s my fear. And I don’t think that’s my fear. That is my fear.

Robin: What I remember about the Great Recession at the time was that it was like bankruptcy — it happens slowly and then all at once. There was a year or more where, granted, I was in the news industry, so I was a little bit of a canary in the coal mine about economic stuff. Especially when companies are affected, the first thing they stop spending on is advertising, and if you’re in the media, you’re pretty sensitive to it. I just remember thinking, it’s getting bad, it’s getting bad, and taking steps to prepare — making sure I had enough emergency savings, getting rid of some discretionary spending. But when the collapse happened, it felt like it happened all at once. And even then, it was so hard to puzzle out what the hell was going on with the mortgage-backed securities and the credit default swaps. It was like pulling a never-ending thread trying to figure out what was causing all of this, and the response was happening before we understood what had just gone down. Whereas with the pandemic, it was pretty clear what was going down.

Kathryn: If you think the AI doomers are right, we have a very complex thread that we don’t know. This is another thing where you could be very distracted trying to understand how AI works and what it does, or you could just focus on what the economic pain could be and respond to that.

Robin: And your overarching concern is that every time we respond to a recession, we’re fighting the last war — that somehow we’re doing it wrong? Actually, you don’t think we did it wrong in the pandemic?

Kathryn: I think the pandemic was close to a best-case scenario, considering just how much was wrong with the economy structurally. It is very hard to bring an economy back to full strength when you’re relying on very broken institutions. You’re getting the IRS to send out stimulus checks when you’ve cut their funding for a decade. You’re trying to get unemployed workers help through a program that is five decades past due for reform. You’re sending out money through PPP loans because you don’t even know how many small non-employer businesses you have or how many people they employ. They erred on the side of generous.

Robin: In part because we didn’t have the sharp tools to really be —

Kathryn: Because we didn’t have the sharp tools. We could have had a lot sharper tools and really sewn that up. The things I look back on as quite helpful: the penalty-free forbearance of mortgages, where you could just say, “I can’t pay,” and you wouldn’t be penalized for not making mortgage payments. Someone clever with money took advantage of that, but it kept people in their homes. It kept people physically safe. And the penalty-free student loan forbearance — that was a windfall for a lot of people who didn’t have to pay that money, and it was a way to increase the amount of cash you gave them, because you were freeing up their budget. I don’t think we ever really got the health stuff right. And I don’t mean health stuff like when we should have been allowed to go outside. I mean, you would not expect people to lose health insurance —

Robin: During a pandemic?

Kathryn: Yeah. We made it all the way through that pandemic, and we still don’t have paid sick days.

Robin: Yeah.

Kathryn: We made it all the way through that pandemic, and we are kicking people off of Medicaid.

Robin: Mm-hmm.

Kathryn: There could have been a moment where there was a sweeping takeover of Medicaid or Medicare. We put a lot of people on Medicaid, but I think it could have been more sweeping and more long-lasting. That was the problem with a lot of the things we did in the pandemic. We had experiments with very big liberal government that we just walked back. As a labor economist, you can’t look at the fastest labor market recovery in history and have much to complain about. I can nitpick, but we got people jobs quickly. And I know inflation sucks, but I’m telling you, a seven-year recession also sucks, especially when it’s preceded by two full years of job loss and then another four and a half to recover. It’s a nightmare.

Robin: If we had recovered from the pandemic recession at the same pace — you’ve told me this before —

Kathryn: Twenty years.

Robin: Twenty years.

Kathryn: So you can look at the shape of recessions. It comes up when there’s a recession; you’ll see it again. It’s basically a chart that normalizes the start of the recession to month zero, and then shows you what percentage of jobs were lost. This is how we make comparisons across an economy that was very differently sized — what percentage of jobs lost in each month of the recession, and how long it took to recover. This chart is somewhat interesting because everything that happens before the year 2000 is really small — it’s under two years. You lose some jobs, not that many, you gain them back, and they’re these little divots. The smiles. The 1990 recession took a while. 2001, we didn’t lose that many jobs, but it took forever to get them back. For not having lost that many jobs in the recession, it was one of the weakest business cycles we’ve ever had. Every other recession, the line stops and turns back up. The Great Recession — it’s incredible. This line just keeps going down. Two years of job loss. We’ve never seen anything like it. In the ‘70s we’d lose jobs for like four months, maybe 10, and then the jobs would jump right back up. We’re shedding jobs for two years, and then it is this painfully slow recovery. So if you just take the percentage of jobs added in every month, and you put the shape of that line onto the nadir of job loss of the pandemic, you’re looking at 20-plus years to recover. It’s lost on people. The Great Recession wiped out all of the job growth we had seen from 2000. It wiped a decade off the map. That was the jobs we lost. And it took us another four years just to get those jobs back.

Robin: We should just say: we are not in a recession, as far as we know, but this is on your mind. I’m kind of curious — should we be preparing? I do feel a little bit like we’re a volunteer fire department every time one of these things happens, and we scramble to find the buckets and the hoses. Maybe we could be less like that.

Kathryn: I think there are two things. One, it would be a lot easier to manage recessions if we didn’t have such a shitty economy the rest of the time. If we had a good unemployment system, if we had very good healthcare — all of these things would be easier if we didn’t have, in some respects, the worst version of social programs.

Robin: Right. Because you’re just making every problem worse when a recession happens.

Kathryn: Yeah. Or maybe this is the way to put it: it’s harder to respond to a recession when you are standing on unstable ground, and the economic and social policy structure that we have is unstable ground. Our unemployment program — you’d think after the number of jobs we lost this century, it would be good. It’s not good. It really needs to be reformed. That makes it harder to nail a recession’s response, because now you’ve got to build an unemployment response on the fly. That, in some ways, happens with every aspect of: who gets money in a stimulus check? Who gets help through Medicaid? Who gets housing forbearance? Who gets student loan forbearance? All of them basically have to be messy, because we don’t have a good system, and then that messiness is what people respond to.

Robin: Right.

Kathryn: But if we had a better way of identifying people in need, because we had really good social programs, we wouldn’t miss so many people. And we wouldn’t have so much helping people who don’t need help, just because we weren’t able to whittle down our aim. I think that’s what I worry about — that this will keep happening. As long as these systems are not functioning on the level they should be, this will keep happening, that every recession will have some kind of mass casualty. I was so overwhelmed by the policy response to the pandemic, because I was like, oh, we’re doing it? We’re doing this? I remember when someone told me on the phone — I was on this policy call, and they’re like, “Hey, we’re talking to people who are experts in UI. What do you think about a $600 weekly benefit?” And I was like, “For who?” They’re like, “For everybody.” I’m like, “For everybody?” My jaw dropped, and I was like, you’re going to be giving people more money on unemployment than they get from their shitty low-wage job. And they’re like, “Yeah, well, their shitty low-wage job doesn’t exist anymore, so we’re going to give everybody 600 bucks.” And I remember thinking, I don’t live in the same world that we lived in 15 years ago. I want people to hold onto that feeling — that inflation has hurt so many people, but in some ways it’s hurt the memory that we bounced back from the pandemic faster than we could have ever hoped going into it, because we were really bold with policy. That cost a lot, but I think putting inflation in the pandemic recovery account isn’t fair. The takeaway is really to think about how this is not what the economy presents us. It is the choices we make in response. And if you are worried about AI, you need to leave all those CEOs alone and go right to your member of Congress, because that is where the difference is going to be made — in what policymakers do. Truly, the next time you hear an AI CEO talk about the economic response, you just need to be like, “Okay, sounds good,” and then go right back to Congress, because what will make the difference for you is not what a company does, but what your government does, because that’s who manages the economy.

Robin: Well, that depends on how much you trust Congress. But let’s take a break, and we’ll come back for executive orders and spiritual sponsors.

EXECUTIVE ORDERS

Robin: We’re back, and we like to end our show with executive orders and spiritual sponsors, starting with our petty rules that we would implement if we ran the world. Kathryn, what’s your executive order?

Kathryn: No, you go first. You go first.

Robin: I’ve been holding onto this one for a while. I think you should have to have a special driver’s license to be allowed to parallel park. Have I said this before?

Kathryn: I don’t know, but I still agree with you.

Robin: I’m not quite sure how this will work, but honest to God, if you don’t know how to parallel park, you should not be allowed to on any major boulevard. Let’s just say, if it’s got a parking meter, it’s major enough that you shouldn’t be allowed to parallel park on it. I cannot — I see people do it.

Kathryn: There’s a park down the street from my house, and people don’t park, they just stop in the lane, and they’re solid like two and a half feet from the curb, and they just stop and turn off their car. I’m like, you’re supposed to kind of hug the curb.

Robin: You’re not even really parallel parking. You’re just taking over a lane.

Kathryn: I thought someone was in trouble. I was like, oh my God, did your car die? No, this is just how you chose to park here? That’s really interesting for you.

Robin: What’s your executive order for the Edwards Republic?

Kathryn: My executive order for the Edwards Republic is that FIFA’s not allowed to sell tickets here anymore. Just not allowed. It’s not that they need to be regulated — I think they’ve lost sale privileges. The government needs to take it over and just start selling these tickets at a reasonable price, refunding people for the incredible amount of money that they sold. I got this horrible prompt from LinkedIn that was like, “Hey, Kathryn, what’s the mood on the ground for the World Cup in Houston?” I was like, I think we’re all pissed. I think it’s an absolute swindle, and we’re all pissed, and this is terrible. And they’re like, “Tell us about the mood at FanFest.” I was like, FanFest is closing my favorite brewery.

Robin: Are they having games in Houston?

Kathryn: Dallas and Houston both have games. Dallas has more. I think Dallas has the most games outside of New York, because it has a semifinal. Houston has group matches, and then I want to say the first round of playoffs are here.

Robin: I got an email — because clearly I’m a sucker, I’m a season ticket holder for the now incredibly losing Angel City Football Club. God, my poor team. Anyway, they were still trying to sell tickets to the matches here in Los Angeles. The cheapest seat available, in the rafters of SoFi Stadium — everything else was $2,500 or up.

Kathryn: It’s absolutely preposterous. If we could have a takeover of FIFA ticketing, refund people, issue the tickets — they’re not allowed to sell here. It’s so gross. There’s an economist I follow on Bluesky who came out with a series of charts of the resale market for games, and he was like, this is all the evidence we need to know that FIFA’s colluding with the resale market. Because the way that tickets are becoming available in the resale market is not chunks of two to three, like we bought a pair of tickets and now we’re selling them. It’s like an entire section is going up for sale. And he’s like, so if you look at it, this is what collusion looks like. If we had an FTC with a spine, we’d be going after these people. But for now, it’ll just live in our land of executive orders.

SPIRITUAL SPONSORS

Robin: I’ll go first again. My spiritual sponsor is a local independent hardware store. I don’t know how these hardware stores manage to employ the number of semi-retired men that they do, but I love that they do. You walk in, and you can’t get halfway down an aisle before somebody’s like, “What are you looking for? What can I help you find?” Unlike Lowe’s or Home Depot or any of the other places you might go, I could just spend hours wandering around a small local hardware store. Love it.

Kathryn: Oh, great sponsor. My spiritual sponsor for the week is that someone wrote us a letter and mailed it to us. I have the letter. My favorite part — they clearly ripped it out of a spiral notebook, which is even better. The first time I read this letter, I sobbed. But I wanted to read a couple of highlights to you, and I think if I tell you I cried, that means I won’t cry this time, and I’m going to keep it together.

Robin: Good luck.

Kathryn: “I discovered Optimist Economy a month ago and have been fully enjoying every episode. I am not an economist myself, but I feel like I try to follow data with the same fervor as Kathryn about the economy.” And he goes on about his situation and ends with, “All that to say, thank you for helping me believe in a possible future that works for more people. Your research, explanation, and down-to-earth humor have softened my heart and proved to me that someone is actually thinking instead of falsely hard-lining ideas.”

Robin: Nice.

Kathryn: And then I have to read the last line, because it’s so good. “Your podcast has helped me find that light of believing in people again, but motherfucker, do we have a long way to go until our elected officials act in favor of the people rather than themselves. Best.” I feel like he got the whole vibe of the show. We’re into it, we’re optimistic, but motherfucker, we’ve got work to do. I was like, thank you so much for this letter.

Robin: Kathryn had a scan of this letter that she shared with all of us, because we’re all in different places. So we all read it last week and loved it. It’s terrific.

Kathryn: So my spiritual sponsor is that guy who wrote us a letter. I need to mail him back to ask him for permission to use his name and the full letter on air, so that’s why I only read highlights.

Robin: Mm-hmm. Yeah.

• • •

Kathryn: Optimist Economy is edited by Sofi LaLonde, and video production for Salsa Media is by Andy Robinson. Thank you, Andy and Sofi.

Robin: Thank you, Andy and Sofi.

Kathryn: Video clips from the show for you to share are available on TikTok, Instagram, Facebook, YouTube, or LinkedIn. You can buy T-shirts, hats, tote bags, and stickers on our website, optimisteconomy.com. And of course, think carefully about what kind of T-shirt you want —

Robin: Or bumper sticker. Or onesie.

Kathryn: If you want “Worker bot,” “I’d rather be consuming leisure,” “Not an economist, still an optimist” — tell us your T-shirt ideas. I think we should expand the merch line, if for no other reason than I want a new shirt.

Robin: You can email those to us at optimist.economy@gmail.com. If you’re on Substack as a free or paid subscriber to Optimist Economy, you can join our group chat there. And if you have the means to contribute at whatever level is comfortable for you, we’ll take your gifts at optimisteconomy.com. Just click donate there.

Kathryn: Cash in a bag, though, baby.

Robin: Or cash.